In his latest guest blog for Investment Sense, Dick Jenkins, Chief Executive of the Bath Building Society, looks at a recent report looking into the UK savings market and how it is poorly serving savers.
The FCA (Financial Conduct Authority) has recently published the first instalment of their long-awaited review into the cash savings market. This extended piece of analysis covers notice and instant access accounts and a further tome is promised on Bonds in due course. I can hardly wait!
Actually, for once I’m not being sarcastic. Not because it’s a right-riveting read chock full of thrilling nuggets, but because the mind-set that the FCA develops to this market through this review will set the tone of the savings market for years to come. And that is of paramount importance to the banking and Building Society industry.
And, of course, to its customers.
Telling us what we already know
In fact, to a large extent the review is entirely predictable to old hands like me. It comes as no surprise to learn that the big banking groups account for 80% plus of the market, that where people have current accounts savings accounts tend to follow, and that customers with funds in old accounts generally earn a slightly lower rate of interest than new money earns. And the big “finding” is that the incidence of switching providers is; wait for it…….. pretty low. Whilst there are some interesting facts and figures in it, it tells us largely what we already know.
The most interesting thing about this report is that it tells us a lot of things that seem to be something of a surprise to our Regulator. And if this really is “new news” to the Regulator, the big question is “How is the Regulator going to react?”. I’ve read it closely to look for clues and at this point I’m not entirely sure. It will all come down to a value judgement as to whether the FCA believes that the lack of switching is the shocking consequence of ill-informed customers and sneaky banks, or just a feature of the market that allows the banks and Building Societies to make a decent return and supply a good flow of funds to lend. It’s not easy to predict the Regulator’s reaction because, unlike the mortgage market, we’ve heard few pronouncements in recent years about savings.
It isn’t all about the headline rate
I do have a sense in reading the report that they have placed too much emphasis on the rates offered to cash savers and not considered sufficiently other elements which come into play when placing cash on deposit, such as the access terms, the convenience of branches and the underlying stability of the deposit taker. And there seems to be little acknowledgement that for a lot of people savings are more about having money for an unforeseen bill or mishap than maximising a return. Our experience is that as long as customers feel that you’re behaving reasonably and straightforwardly, most are happy to stay with you, safe in the knowledge that you are a secure and creditworthy institution, especially if you can offer a decent service. The FCA concedes that where people have low balances it may not be worth their while to switch, but they do seem genuinely disappointed and a little bit piqued that more of us don’t.
Of course, this is a bit of an unrepresentative time to be studying this market, when interest rates are at an all-time low and managing savings is a loss making business. Loss making because, unless they can lend the funds out immediately, deposit takers have to basically park up the funds at rates below those which are offered to savers. And we are still a couple of years away from the point where deposit takers will be vying for saver’s funds to replace the cheap money borrowed from the Bank of England under its Funding for Lending Scheme.
Note: This article reflects the view of the author. It does not necessarily reflect the view of Investment Sense Limited. The article has been checked and approved to ensure that it is both accurate and not misleading. However, this is a blog and the reader should accept that by its very nature many of the points are subjective and opinions of the author.